What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-05 compared with 2024-05-02 · 206 added, 89 removed, 338 unchanged (47% of the section changed)

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We also offer a proprietary pharmacogenomics (“PGx”) test to guide optimal drug treatment for patients diagnosed with depression, anxiety and other mental health conditions.

Currently, our revenue is primarily generated by our DecisionDx-Melanoma risk stratification test for cutaneous melanoma (“CM”), which is supplemented by revenue generated from our DecisionDx-SCC risk stratification test for cutaneous squamous cell carcinoma (“SCC”), our TissueCypher risk stratification test for BE and our DecisionDx-UM risk stratification test for uveal melanoma (“UM”).

All five of our MAAA tests have been granted Advanced Diagnostic Laboratory (“ADLT”) test status by the Centers for Medicare & Medicaid Services (“CMS”) which means each test has demonstrated that (i) when combined with an empirically derived algorithm, it yields a result that predicts the probability a specific individual patient will develop a certain condition or conditions, or will respond to a particular therapy or therapies;

All five of our MAAA tests have been granted Advanced Diagnostic Laboratory Test (“ADLT”) status by the Centers for Medicare & Medicaid Services (“CMS”) which means each test has demonstrated that (i) when combined with an empirically derived algorithm, it yields a result that predicts the probability a specific individual patient will develop a certain condition or conditions, or will respond to a particular therapy or therapies;

and (ii) it provides new clinical diagnostic information that cannot be obtained from any other test or combination of tests.

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Our Dermatologic Tests

DecisionDx-Melanoma is our proprietary risk stratification gene expression profile (“GEP”) test that is designed to predict the risk of metastasis or recurrence for patients diagnosed with invasive cutaneous melanoma.

year, we estimate approximately 130,000 patients are diagnosed with invasive cutaneous melanoma in the United States, representing an estimated U.S.

In a typical year, we estimate

approximately 130,000 patients are diagnosed with invasive CM in the United States, representing an estimated U.S.

total addressable market (“TAM”) of approximately $540 million.

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Our Gastroenterology Test

TissueCypher is our proprietary risk stratification spatialomics test designed to predict future development of high-grade dysplasia and/or esophageal cancer in patients with non-dysplastic, indefinite dysplasia or low-grade dysplasia BE.

TissueCypher is our proprietary risk stratification spatial omics test designed to predict future development of high-grade dysplasia and/or esophageal cancer in patients with non-dysplastic, indefinite dysplasia or low-grade dysplasia BE.

We estimate a U.S.

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During the year ended December 31, 2023, we continued to expand our dermatologic and gastrointestinal commercial sales forces through territory and headcount expansions with focus being on our DecisionDx Melanoma, DecisionDx-SCC, and TissueCypher tests.

During the six months ended June 30, 2024, we further expanded our sales and marketing team for our TissueCypher test.

We will continue to assess market response in determining further commercial expansions and commercial team structure.

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MyPath Melanoma was approved as a “new ADLT” in September 2019.

Rates for our MyPath Melanoma test is set annually based upon the median private payor rate for the first half of the second preceding calendar year.

The rate for our MyPath Melanoma test is set annually based upon the median private payor rate for the first half of the second preceding calendar year.

Our 2023 rate was set at $1,755 per test, based on data submitted by the predecessor owner of the Myriad MyPath Laboratory relating to the first half of 2021.

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The comment period for the draft LCDs ended on July 22, 2023.

Decision-SCC was reimbursed at a rate of $3,873 per test under a PLA code from second quarter of 2022 through June 30, 2023 when CMS determined DecisionDx-SCC meets the criteria for “new ADLT” status.

On July 4, 2024, the LCD was finalized as proposed with a future effective date of August 18, 2024.

DecisionDx-SCC was reimbursed at a rate of $3,873 per test under a PLA code from second quarter of 2022 through June 30, 2023 when CMS determined DecisionDx-SCC meets the criteria for “new ADLT” status.

Effective July 1, 2023 and through March 31, 2024, CMS set the initial period rate equal to the list price of $8,500 per test.

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In November 2023, CMS posted its final CLFS determination which crosswalks our PLA CPT code to an existing PLA code at a rate of $1,336 per test effective January 1, 2024.

Government Regulation and Oversight of Laboratory Developed Tests

On April 29, 2024, the U.S.

Food and Drug Administration (“FDA”) published a final rule on the regulation of Laboratory Developed Tests (“LDTs”) which amends the FDA's regulations to make explicit that LDT's are devices under the Federal Food, Drug, and Cosmetic Act (“FD&C Act”).

The FDA issued a policy to phase out, over the course of four years, its general enforcement discretion approach to LDTs and also issued targeted enforcement discretion policies for certain categories of LDTs.

The FDA is continuing enforcement discretion for currently marketed tests offered as LDTs (that were first marketed before May 6, 2024) that are approved by the New York State Department of Health Clinical Laboratory Evaluation Program (“NYS CLEP”).

Our proprietary tests, outlined above, are all NYS CLEP approved.

We believe this final ruling will have no material impact on our existing test offerings given all of our tests were marketed before May 6, 2024.

Delivered Test Reports

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A test report is generated when we receive a sample in our laboratory, and then the relevant test information is entered into our Laboratory Information Management System, the laboratory portion of the test is performed, including proprietary algorithmic analysis of the combined biomarkers, and a report is then generated which is delivered to the clinician who ordered the test.

The number of test reports delivered by us during the three months ended March 31, 2024, during each quarter in 2023 and for the year ended December 31, 2023 are presented in the table below:

The number of test reports delivered by us during the six months ended June 30, 2024 and 2023 and for the year ended December 31, 2023 are presented in the table below:

Proprietary Dermatologic GEP Tests

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Q2 2024 9,585 4,277 1,099 14,961 456 4,782 4,903 25,102

For the six months ended June 30, 2024

17,969 7,854 2,097 27,920 878 8,211 8,981 45,990

Q1 2023 7,583 2,411 980 10,974 409 1,383 2,150 14,916

Q2 2023 8,597 2,681 953 12,231 461 1,447 2,681 16,820

For the six months ended June 30, 2023

16,180 5,092 1,933 23,205 870 2,830 4,831 31,736

Q3 2023 8,559 2,820 1,011 12,390 399 2,829 2,791 18,409

Q4 2023 8,591 3,530 1,018 13,139 405 3,441 3,299 20,284

For year ended December 31, 2023 33,330 11,442 3,962 48,734 1,674 9,100 10,921 70,429

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(2) We temporarily paused accepting additional orders in July 2023 and resumed accepting new orders in a phased approach in September 2023.

We completed processing of our pre-existing backlog orders in October 2023 and continue to accept new orders as of March 31, 2024.

For the three months ended March 31, 2024, our test report volume increased by 40.0% compared to the same period in 2023.

Our dermatologic test report volume increased by 18.1% for the three months ended March 31, 2024, compared to the prior period in 2023, largely driven by continued growth from our DecisionDx-Melanoma and DecisionDx-SCC tests.

We completed processing of our pre-existing backlog orders in October 2023 and continue to accept new orders as of June 30, 2024.

For the three and six months ended June 30, 2024, our test report volume increased by 49.2% and 44.9%, respectively, compared to the same period in 2023.

Our dermatologic test report volume increased by 22% and 20.3% for the three and six months ended June 30, 2024, respectively, compared to the prior period in 2023, largely driven by continued growth from our DecisionDx-Melanoma and DecisionDx-SCC tests.

Increases from our other tests (non-dermatologic), primarily IDgenetix and TissueCypher, also contributed to the overall volume increase.

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In developing our DecisionDx-SCC test, we believed that in addition to addressing significant unmet clinical needs, we would see opportunities for leverage, as many of the clinicians currently ordering DecisionDx-Melanoma would likely be the same clinicians who would find value in our DecisionDx-SCC test.

For example, we found that during the three months ended March 31, 2024, approximately 55% of all clinicians ordering DecisionDx-SCC had also ordered our DecisionDx-Melanoma test during that same period.

For example, we found that during the six months ended June 30, 2024, approximately 68% of all clinicians ordering DecisionDx-SCC had also ordered our DecisionDx-Melanoma test during that same period.

Information About Certain Metrics

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Our Financial Results

Our net loss may fluctuate significantly from period to period, depending on the timing of our planned development activities, the growth of our sales and marketing activities and the timing of revenue recognition under ASC 606.

Our net income may fluctuate significantly from period to period, depending on the timing of our planned development activities, the growth of our sales and marketing activities and the timing of revenue recognition under ASC 606.

We expect our expenses will increase substantially over time as we:

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For tests with limited reimbursement experience or no coverage, we recognize revenues on the basis of actual cash collections.

Our ability to increase our revenues will depend on our ability to further penetrate our target markets, and, in particular, generate sales through our direct sales force, develop and commercialize additional tests, including

through acquisitions, obtain reimbursement from additional third-party payors and increase our reimbursement rate for tests performed.

Our ability to increase our revenues will depend on our ability to further penetrate our target markets, and, in particular, generate sales through our direct sales force, maintain Medicare coverage for our currently marketed products, develop and commercialize additional tests, including through acquisitions, obtain reimbursement from additional third-party payors and increase our reimbursement rate for tests performed.

Cost of Sales (exclusive of amortization of acquired intangible assets)

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Additionally, we expect cost of sales to increase with the expansion of laboratory capacity and staffing in advance of the anticipated growth of our more recently launched tests and tests acquired through acquisitions.

For example, we commenced operations in a new expanded laboratory facility in Pittsburgh, Pennsylvania in the second quarter of 2023 and expect to operate additional lab space in Pittsburgh by end of 2024.

For example, we commenced operations in a newly expanded laboratory facility in Pittsburgh, Pennsylvania in the second quarter of 2023 and expect to operate additional lab space in Pittsburgh by end of 2024.

Gross margin and gross margin percentage are key indicators we use to assess our business.

See the table in “Results of Operations—Comparison of the Three Months ended March 31, 2024 and 2023” for details.

See the table in “Results of Operations—Comparison of the Three Months Ended June 30, 2024 and 2023” and “Results of Operations—Comparison of the Six Months Ended June 30, 2024 and 2023” for details.

Research and Development

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We expense all research and development costs in the periods in which they are incurred.

We expect our research and development expenses to increase in absolute dollars as we continue to invest in research and development activities related to developing enhanced and new products.

our research and development expenses to increase in absolute dollars as we continue to invest in research and development activities related to developing enhanced and new products.

We expect to use a portion of our cash and cash equivalents and marketable investment securities to further support and accelerate our research and development activities, including important studies that are underway to support our DecisionDx-Melanoma test.

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Also, in 2021, we initiated our large prospective, multi-center clinical study to develop, validate and bring to market a pipeline genomic test, or tests, aimed at predicting response to systemic therapy in patients with moderate to severe psoriasis, atopic dermatitis and related inflammatory skin conditions.

As of March 31, 2024, there were more than 44 active clinical study sites and over 1,100 patients enrolled in this study.

As of June 30, 2024, there were more than 41 active clinical study sites and over 1,100 patients enrolled in this study.

Assuming we are successful in validating a genomic test, or tests, for one or more of these uses, then we expect to launch this pipeline test by the end of 2025.

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Interest Expense

Interest expense is primarily attributable to finance leases and long-term debt.

Income Tax Expense

Interest expense is primarily attributable to long-term debt and finance leases.

Income Tax (Benefit) Expense

Our consolidated financial statements do not reflect any federal or state income tax benefits attributable to the pre-tax losses we have incurred, due to the uncertainty of realizing a benefit from those items.

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Results of Operations

Comparison of the Three Months Ended March 31, 2024 and 2023

Comparison of the Three Months Ended June 30, 2024 and 2023

The following table summarizes our results of operations for the periods indicated (in thousands, except percentages):

Three Months Ended

March 31, Change

June 30, Change

Net revenues $ 87,002 $ 50,138 $ 36,864 73.5 %

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Total operating expenses, net 81,990 71,295 10,695 15.0 %

Operating loss (5,471) (31,522) 26,051 82.6 %

Operating income (loss) 5,012 (21,157) 26,169 123.7 %

Interest income 3,144 2,399 745 31.1 %

Interest expense (14) (4) (10) (250.0) %

Loss before income taxes (2,489) (29,190) 26,701 91.5 %

Income tax expense 45 14 31 221.4 %

Net loss $ (2,534) $ (29,204) $ 26,670 91.3 %

Interest expense (270) (3) (267) NM

Income (loss) before income taxes 7,886 (18,761) 26,647 142.0 %

Income tax (benefit) expense (1,034) 16 (1,050) NM

Net income (loss) $ 8,920 $ (18,777) $ 27,697 147.5 %

NM = Not meaningful

The following table indicates the amount of stock-based compensation expense (non-cash) reflected in the line items above (in thousands):

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Gross margin percentage 80.7 % 73.5 % 7.2 %

Net revenues for the three months ended March 31, 2024 increased by $30.9 million, or 73.6%, to $73.0 million compared to the three months ended March 31, 2023, due to a $23.4 million increase in revenue from our dermatologic tests and a $7.5 million increase in revenue from our non-dermatologic tests.

The increase from our dermatologic tests was primarily due to a higher average selling price for DecisionDx-SCC tests, where we began receiving Medicare reimbursement at a higher rate beginning in July 2023, increases in test report volume of 10.6% for DecisionDx-Melanoma and 48.4% for DecisionDx-SCC, and a slightly higher average selling price for DecisionDx-Melanoma.

The increase in revenue from our non-dermatologic tests of $7.5 million was primarily attributable to our TissueCypher test, due to a higher average selling price and higher test report volume.

Our IDgenetix test also contributed to the increase in non-dermatologic revenues during the period due to a higher average selling price and higher test report volume.

Net revenue from our non-dermatologic tests as a percentage of total net revenue increased from 14.6% for the three months ended March 31, 2023 to 18.7% for the three months ended March 31, 2024.

Contributing to the increases in total net revenues was the effect of variations in revenue adjustments related to tests delivered in previous periods, associated with changes in estimated variable consideration, which were $1.7 million of net positive revenue adjustments for the three months ended March 31, 2024, compared to $1.3 million of net negative revenue adjustments for the three months ended March 31, 2023.

Net revenues for the three months ended June 30, 2024 increased by $36.9 million, or 73.5%, to $87.0 million compared to the three months ended June 30, 2023, due to a $25.8 million increase in revenue from our dermatologic tests and a $11.1 million increase in revenue from our non-dermatologic tests.

The increase from our dermatologic tests of $25.8 million was primarily due to a higher average selling price for DecisionDx-SCC tests, where we began receiving Medicare reimbursement at a higher rate beginning in July 2023, as well as increases in test report volume of 59.5% for DecisionDx-SCC and 11.5% for DecisionDx-Melanoma.

The increase in revenue from our non-dermatologic tests of $11.1 million was primarily attributable to our TissueCypher test, due to higher test report volume and a higher average selling price.

Our IDgenetix test also contributed to the increase in non-dermatologic revenues during the period due to higher test report volume and a higher average selling price.

Net revenue from our non-dermatologic tests as a percentage of total net revenue increased from 14.2% for the three months ended June 30, 2023 to 20.9% for the three months ended June 30, 2024.

Contributing to the increases in total net revenues was the effect of variations in revenue adjustments related to tests delivered in previous periods, associated with changes in estimated variable consideration, which were $0.4 million of net positive revenue adjustments for the three months ended June 30, 2024, compared to $0.1 million of net negative revenue adjustments for the three months ended June 30, 2023.

These amounts include (i) adjustments for actual collections versus estimated amounts and (ii) cash collections and the related recognition of revenue in current period for tests delivered in prior periods due to the release of the constraint on variable consideration.

Cost of Sales (exclusive of amortization of acquired intangible assets)

Cost of sales (exclusive of amortization of acquired intangible assets) for the three months ended March 31, 2024 increased by $3.7 million, or 36.5%, compared to the three months ended March 31, 2023, primarily due to higher personnel costs and increased expenditures on supplies.

The increase in personnel costs primarily consists of higher salaries and wages, employee benefits and bonuses, reflecting headcount additions made to support business growth as well as merit and annual inflationary wage adjustment for existing employees.

Cost of sales (exclusive of amortization of acquired intangible assets) for the three months ended June 30, 2024 increased by $3.5 million, or 31.3%, compared to the three months ended June 30, 2023, primarily due to higher personnel costs and increased expenditures on supplies.

The increase in personnel costs primarily consists of higher salaries and wages, bonuses, stock-based compensation, and employee benefits, reflecting headcount additions made to support business growth as well as merit and annual inflationary wage adjustment for existing employees.

Supply and service expenses increased largely due to our higher test volumes.

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We expect our cost of sales expenses (exclusive of amortization of acquired intangible assets) to continue to increase in future periods as we hire additional laboratory personnel and related resources to support our expected growth in volume for our dermatologic, gastrointestinal, mental health and pipeline tests.

Our gross margin percentage was 77.9% for the three months ended March 31, 2024, compared to 70.5% for the same period in 2023.

Our gross margin percentage was 80.7% for the three months ended June 30, 2024, compared to 73.5% for the same period in 2023.

The increase was primarily due to higher revenues which were attributable to increases in both test report volumes and average selling prices, partially offset by higher personnel costs and higher supplies expenditures, both of which have increased due to our expanded laboratory capacity and higher test report volumes.

Research and Development

Research and development expenses decreased by $0.6 million, or 4.1%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily consisting of lower clinical studies expenses and advisory services partially offset by higher personnel costs.

Decreases in clinical studies expense were primarily attributable to CM studies and our other inflammatory skin disease pipeline studies.

Higher personnel costs are primarily a result of higher salaries and wages, and bonuses, all of which increased due to headcount expansions as well as merit and annual inflationary wage adjustment for existing employees.

Research and development expenses decreased by $0.8 million, or 6.2%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023.

The increase is primarily due to higher personnel costs and clinical studies.

Higher personnel costs are primarily a result of higher salaries and wages, bonuses, and stock-based compensation expenses all of which increased due to headcount expansions as well as merit and annual inflationary wage adjustment for existing employees.

The higher personnel costs and clinical studies expenses were partially offset by lower general administration expenses across the department and advisory board.

We expect research and development expense to increase as we continue to invest in ongoing pipeline initiatives as well as seek opportunities to branch out upstream, downstream and parallel to our existing commercial tests, within or adjacent to our established dermatology commercial call points.

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Total selling, general and administrative expense $ 51,088 $ 44,681 $ 6,407

Sales and marketing expenses increased by $0.6 million, or 2.0%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023.

The increase is primarily due to higher expense for training events and speaker conferences and expense for salary and wages, partially offset by lower expense for travel and lower stock-based compensation expense.

Increases in salary and wages reflect headcount expansions as well as merit and annual inflationary wage adjustment for existing employees.

Stock-based compensation expense included in sales and marketing was $4.7 million for the three months ended March 31, 2024, compared to $4.9 million for the three months ended March 31, 2023, a decrease of $0.2 million.

Decreases in stock-based compensation expense is primarily attributable to the timing of annual grants where an annual grant was made in December 2022 and the next annual grant was not made until March 2024.

General and administrative expenses increased by $1.1 million, or 6.7%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023.

The increase is primarily attributable to higher expense for professional services, higher general administrative costs, and higher salaries and wage expense partially offset by lower stock-based compensation expense.

Increases in salary and wage expense reflect headcount expansions in our administrative support functions and merit and annual inflationary wage adjustment for existing employees.

Stock-based compensation expense included in general and administrative expense was $4.0 million for the three months ended March 31, 2024, compared to $4.7 million for the three months ended March 31, 2023, a decrease of $0.7 million.

Sales and marketing expenses increased by $4.4 million, or 15.7%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023.

The increase is primarily due to higher personnel costs and marketing expenses associated with travel, training events and speaker conferences.

Increases in personnel costs reflect headcount expansions as well as merit and annual inflationary wage adjustment for existing employees.

Stock-based compensation expense included in sales and marketing was $4.8 million for the three months ended June 30, 2024, compared to $4.7 million for the three months ended June 30, 2023.

General and administrative expenses increased by $2.0 million, or 12.1%, for the three months ended June 30, 2024, compared to the three months ended June 30, 2023.

The increase is primarily attributable to higher personnel costs (including expenses for salaries, bonuses, and benefits), reflecting headcount expansions in our administrative support functions as well as merit and annual inflationary wage adjustment for existing employees, and to a lesser extent, higher expenses for professional services, subscriptions and licensing.

Stock-based compensation expense included in general and administrative expense was $4.4 million for the three months ended June 30, 2024, compared to $4.5 million for the three months ended June 30, 2023.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets for the three months ended March 31, 2024 was $2.2 million and remains consistent as compared to the three months ended March 31, 2023.

Interest and Other Non-Operating Income

Interest income increased by $0.7 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily as a result of higher interest rates and our purchases of marketable investment securities beginning in September of 2022.

Amortization of acquired intangible assets for the three months ended June 30, 2024 was $2.2 million and remains consistent as compared to the three months ended June 30, 2023.

Interest Income

Interest income increased by $0.7 million for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily as a result of higher average balances of marketable investment securities and slightly higher interest rates.

Interest Expense

Interest expense increased by $0.3 million for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to interest incurred on our long-term debt where we had no debt outstanding during the comparative period.

Income Tax (Benefit) Expense

Income tax benefit was $1.0 million for the three months ended June 30, 2024 and was due to changes in our valuation allowance, state income taxes and the non-deductibility of other permanent items .

We recorded a minimal amount in income tax expense for the three months ended June 30, 2023.

Stock-Based Compensation Expense

Stock-based compensation expense, which is allocated among cost of sales, research and development expense and SG&A expense, totaled $12.7 million for the three months ended March 31, 2024, compared to $13.5 million for the three months ended March 31, 2023.

Stock-based compensation expense, which is allocated among cost of sales, research and development expense and SG&A expense, totaled $13.2 million for the three months ended June 30, 2024, compared to $12.8 million for the three months ended June 30, 2023.

The increase is primarily due to our annual grant of equity awards in March 2024.

We expect material increases in stock-based compensation expense in future periods, attributable to both existing awards outstanding and anticipated additional grants to our current and future employees.

As of June 30, 2024, we had 703 employees, compared to 582 as of June 30, 2023.

As of June 30, 2024, the total unrecognized stock-based compensation cost related to outstanding awards was $94.6 million, which is expected to be recognized over a weighted-average period of 2.4 years.

Comparison of the Six Months Ended June 30, 2024 and 2023

The following table summarizes our results of operations for the periods indicated (in thousands, except percentages):

Six Months Ended

June 30, Change

Net revenues $ 159,976 $ 92,175 $ 67,801 73.6 %

Operating expenses

Cost of sales (exclusive of amortization of acquired intangible assets) 28,413 21,240 7,173 33.8 %

Research and development 27,945 27,701 244 0.9 %

Selling, general and administrative 99,583 91,443 8,140 8.9 %

Amortization of acquired intangible assets 4,494 4,470 24 0.5 %

Total operating expenses, net 160,435 144,854 15,581 10.8 %

Operating loss (459) (52,679) 52,220 99.1 %

Interest income 6,140 4,735 1,405 29.7 %

Interest expense (284) (7) (277) NM

Income (loss) before income taxes 5,397 (47,951) 53,348 111.3 %

Income tax (benefit) expense (989) 30 (1,019) NM

Net income (loss) $ 6,386 $ (47,981) $ 54,367 113.3 %

NM = Not meaningful

The following table indicates the amount of stock-based compensation expense (non-cash) reflected in the line items above (in thousands):

Six Months Ended

2024 2023 Change

Cost of sales (exclusive of amortization of acquired intangible assets) $ 2,715 $ 2,474 $ 241

Research and development 5,266 5,073 193

Selling, general and administrative 17,873 18,827 (954)

Total stock-based compensation expense $ 25,854 $ 26,374 $ (520)

The following table provides a disaggregation of net revenues by type (in thousands):

Six Months Ended

2024 2023 Change

Dermatologic (1)

$ 128,163 $ 78,941 $ 49,222

Non-Dermatologic (2)

31,813 13,234 18,579

Total net revenues $ 159,976 $ 92,175 $ 67,801

(1) Consists of DecisionDx-Melanoma, DecisionDx-SCC and our Diagnostic GEP offering.

(2) Consists of TissueCypher, DecisionDx-UM and IDgenetix.

The following table presents the calculation of gross margin (in thousands, except percentages):

Six Months Ended

2024 2023 Change

Net revenues $ 159,976 $ 92,175 $ 67,801

Cost of sales (exclusive of amortization of acquired intangible assets) 28,413 21,240 7,173

Amortization of acquired intangible assets 4,494 4,470 24

Gross margin $ 127,069 $ 66,465 $ 60,604

Gross margin percentage 79.4 % 72.1 % 7.3 %

Net revenues for the six months ended June 30, 2024 increased by $67.8 million, or 73.6%, to $160.0 million compared to the six months ended June 30, 2023, due to a $49.2 million increase in revenue from our dermatologic tests and a $18.6 million increase in revenue from our non-dermatologic tests.

The increase from our dermatologic tests of $49.2 million was primarily due to a higher average selling price for DecisionDx-SCC tests, where we began receiving Medicare reimbursement at a higher rate beginning in July 2023, an increase in DecisionDx-SCC test report volume of 54.2%, and an increase in test report volume of 11.1% and a higher average selling price for DecisionDx-Melanoma.

The increase in revenue from our non-dermatologic tests of $18.6 million was primarily attributable to TissueCypher, due to higher test report volume and a higher average selling price.

Our IDgenetix test also contributed to the increase in non-dermatologic revenues during the period due to higher test report volume and a higher average selling price.

Net revenue from our non-dermatologic tests as a percentage of total net revenue increased from 14.4% for the six months ended June 30, 2023 to 19.9% for the six months ended June 30, 2024.

The increases in total net revenues were partially offset by the effect of variations in revenue adjustments related to tests delivered in previous periods, associated with changes in estimated variable consideration, which were $1.0 million of net positive revenue adjustments for the six months ended June 30, 2024, compared to $1.7 million of net negative revenue adjustments for the same period in 2022.

Cost of Sales (exclusive of amortization of acquired intangible assets)

Cost of sales (exclusive of amortization of acquired intangible assets) for the six months ended June 30, 2024 increased by $7.2 million, or 33.8%, compared to the six months ended June 30, 2023, primarily due to increased higher personnel costs, expenditures on supplies and third-party services.

The increase in personnel costs, including increases in salaries and wages, bonuses, employee benefits and stock-based compensation expenses, was primarily due to increased headcount driven by our expanded laboratory capacity.

The increased personnel costs also reflect higher salaries and wages for existing employees.

Supply and service expenses have increased due to higher laboratory activity, which is attributable to higher test report volume.

Due to the nature of our business, a significant portion of our cost of sales expenses represents fixed costs associated with our testing operations.

Accordingly, our cost of sales expense will not necessarily increase or decrease commensurately with the change in net revenues from period to period.

Our gross margin percentage was 79.4% for the six months ended June 30, 2024, compared to 72.1% for the six months ended June 30, 2023.

The increase was primarily due to higher revenues, partially offset by higher personnel costs and supplies expenditures, attributable to increases in laboratory headcount as well as higher rates of pay, and variations in revenue adjustments related to tests delivered in previous periods.

Research and Development

Research and development expenses increased by $0.2 million, or 0.9%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023 consisting of increases in personnel costs partially offset by lower advisory costs and lower clinical studies expense.

Increases in personnel costs, including higher salaries and wages, bonuses, stock-based compensation and employee benefits, were primarily due to headcount expansions in support of business growth.

We expect to continue to invest in our research and development expenses as we fund ongoing evidence development related to our existing products as well as additional pipeline programs.

Selling, General and Administrative

The following table provides a breakdown of SG&A expenses (in thousands):

Six Months Ended

2024 2023 Change

Sales and marketing $ 63,219 $ 58,197 $ 5,022

General and administrative 36,364 33,246 3,118

Total selling, general and administrative expense $ 99,583 $ 91,443 $ 8,140

Sales and marketing expenses increased by $5.0 million, or 8.6%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023.

Of this increase, $2.3 million is attributable to higher salary and wage expense, which has increased through the expansion of our dermatology-facing and non-dermatology-facing commercial teams, as well as through merit and annual inflationary wage adjustment for existing employees.

The remainder of the increase in sales and marketing expenses was primarily due to increases in organization development and training costs, which was also attributable to expansions in our commercial operations including headcount.

Stock-based compensation expense included in sales and marketing expense was $9.5 million for the six months ended June 30, 2024, compared to $9.6 million for the six months ended June 30, 2023.

The decrease in stock-based compensation expense is primarily attributable to the timing of annual grants where an annual grant was made in December 2022 and the next annual grant was not made until March 2024.

General and administrative expenses increased by $3.1 million, or 9.4%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023.

Of this increase, $1.4 million is attributable to higher personnel costs (including expenses for salaries, bonuses, and benefits), higher professional fees and higher information technology-related costs.

Higher personnel costs reflect expanded headcount in our administrative support functions as well as higher rates of salaries and wages.

Stock-based compensation expense included in general and administrative expense was $8.4 million for the six months ended June 30, 2024, compared to $9.2 million for the six months ended June 30, 2023.

The remainder of the increase in general and administrative expenses was primarily associated with general increases across various categories.

Amortization of Acquired Intangible Assets

Amortization of acquired intangible assets for the six months ended June 30, 2024 was $4.5 million and remains consistent as compared to the six months ended June 30, 2023.

Interest Income

Interest income increased by $1.4 million for the six months ended June 30, 2024 , compared to the six months ended June 30, 2023 , primarily as a result of higher average balances of marketable investment securities and slightly higher interest rates.

Interest Expense

Interest expense increased by $0.3 million for the six months ended June 30, 2024, compared to the six months ended June 30, 2023 , primarily due to interest incurred on our long-term debt where we had no debt outstanding during the comparative period.

Income Tax (Benefit) Expense

Income tax benefit was $1.0 million for the six months ended June 30, 2024 and was due to changes in our valuation allowance, state income taxes and the non-deductibility of other permanent items .

We recorded a minimal amount in income tax expense for the six months ended June 30, 2023 .

Stock-Based Compensation Expense

Stock-based compensation expense, which is allocated among cost of sales, research and development expense and SG&A expense, totaled $25.9 million for the six months ended June 30, 2024, compared to $26.4 million for the six months ended June 30, 2023.

The decrease is primarily due to the timing of annual grants where an annual grant was made in December 2022 and the next annual grant was not made until March 2024.

material increases in stock-based compensation expense in future periods, attributable to both existing awards outstanding and anticipated additional grants to our current and future employees.

As of March 31, 2024, we had 638 employees, compared to 562 as of March 31, 2023.

As of March 31, 2024, the total unrecognized stock-based compensation cost related to outstanding awards was $103.1 million, which is expected to be recognized over a weighted-average period of 2.5 years.

As of June 30, 2024, we had 703 employees compared to 582 as of June 30, 2023.

Liquidity and Capital Resources

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All of our marketable investment securities are considered investment grade, are readily available for use in current operations and have contractual maturities of one year or less.

As of March 31, 2024 and December 31, 2023, we had marketable investment securities of $156.3 million and $144.3 million, respectively.

As of March 31, 2024 and December 31, 2023, we had cash and cash equivalents of $82.9 million and $98.8 million, respectively.

As of March 31, 2024, we had a $25 million credit-line available under the 2024 LSA.

Since becoming a public company, our liquidity has been primarily derived from the revenue generated from the sale of our products, proceeds from our initial public offering of common stock on July 29, 2019 (the “IPO”), follow-on public offerings of common stock in June 2020 and December 2020.

As of June 30, 2024 and December 31, 2023, we had marketable investment securities of $174.1 million and $144.3 million, respectively.

As of June 30, 2024 and December 31, 2023, we had cash and cash equivalents of $85.6 million and $98.8 million, respectively.

As of June 30, 2024, we had a $25 million credit-line available under the 2024 LSA.

Our liquidity has been primarily derived from the revenue generated from the sale of our products and proceeds from our initial public offering of common stock in July 29, 2019 (the “IPO”) and our follow-on public offerings of common stock in June and December of 2020.

We believe that our existing cash and cash equivalents, marketable investment securities and anticipated cash generated from sales of our products will be sufficient to fund our operations for at least the next 12 months.

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Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, clinical research and development services, laboratory operations, equipment and related supplies, legal and other regulatory expenses, general administrative costs and, from time to time, expansion of our laboratory and office facilities in support of our growth, such as the construction of our future corporate headquarters.

We anticipate that a substantial portion of our cash requirements in the foreseeable future will relate to the further commercialization of our currently marketed products, the development of our future product candidates in our pipeline and the potential commercialization of these pipeline products, should their development be successful.

On July 10, 2023, following approval by our board of directors, we entered into a definitive agreement to purchase a plot of land located in Friendswood, Texas for a purchase price of $7.6 million, subject to certain adjustments, for the purpose of developing a commercial office building to be used as our future corporate headquarters.

the purpose of developing a commercial office building to be used as our future corporate headquarters.

On February 9, 2024, we closed on the purchase of the land for cash consideration of $7.2 million.

During the three months ended June 30, 2023, we began incurring costs, and making payments, to prepare the land for further development.

In connection with our acquisition of AltheaDx, we agreed to pay contingent consideration of up $75.0 million, payable 50% in cash and 50% in common stock, based on the achievement of certain commercial milestones relating to the years ending December 31, 2022, 2023 and 2024.

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The AltheaDx Earnout Payments included a 2022 catch-up provision for additional payment of up to $17.5 million that expired in 2023.

Therefore, as of March 31, 2024, we have a potential payment obligation of up to $20.0 million with respect to the remaining commercial milestones for 2024.

Therefore, as of June 30, 2024, we have a potential payment obligation of up to $20.0 million with respect to the remaining commercial milestones for 2024.

The number of shares of our common stock that may be issued in connection with the commercial milestone payment for 2024 is subject to limitations.

Since our inception, we have generally incurred significant losses and negative operating cash flows.

For the year ended December 31, 2023 we had a net loss of $57.5 million and an accumulated deficit of $218.4 million as of December 31, 2023.

For the three months ended March 31, 2024, we had a net loss of $2.5 million and an accumulated deficit of $220.9 million as of March 31, 2024.

Our ability to generate revenue sufficient to achieve profitability will depend heavily on the successful commercialization of our currently marketed products and the products we plan to launch in the future as well as our spending on research and development activities.

We expect to incur additional expenses and losses in the future as we invest in the commercialization of our existing products and the development and commercialization of our current pipeline products and future product candidates.

we expect that any acquisitions of businesses, products, assets or technologies will also increase our expenses.

For the year ended December 31, 2023, we had a net loss of $57.5 million, used $5.6 million in operating cash flows, and had an accumulated deficit of $218.4 million.

For the six months ended June 30, 2024, we had net income of $6.4 million and positive operating cash flows of $17.2 million.

Our ability to maintain profitability will heavily depend on us maintaining Medicare coverage for our currently marketed products, on the successful commercialization of the products we plan to launch in the future, and our ability to manage operating expenses.

We expect to incur additional expenses in the future as we invest in the commercialization of our existing products and the development and commercialization of our current pipeline products and future product candidates.

We believe that our existing cash and cash equivalents, marketable investment securities and anticipated cash generated from the sale of our commercial products will be sufficient to fund our operations for at least the next 12 months.

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We had no debt as of December 31, 2023.

Our long-term debt as of March 31, 2024 is presented in the table below (in thousands):

March 31, 2024

Our long-term debt as of June 30, 2024 is presented in the table below (in thousands):

June 30, 2024

Term debt $ 10,200

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The obligations under the 2024 LSA are secured by substantially all of our assets, excluding intellectual property, the real property held by the Company, and are subject to certain other exceptions and limitations.

right to prepay the 2024 LSA in whole, subject to a prepayment fee of approximately 1.50% if paid prior to March 26, 2026.

We have the right to prepay the 2024 LSA in whole, subject to a prepayment fee of approximately 1.50% if paid prior to March 26, 2026.

Amounts repaid under the 2024 LSA may not be reborrowed.

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Should we seek to amend the terms of the 2024 LSA, the consent of the Lender would be required.

As of March 31, 2024, we were in compliance with this covenant.

As of June 30, 2024, we were in compliance with this covenant.

The 2024 LSA bears interest at a floating rate equal to the greater of (a) the WSJ Prime Rate plus 0.25% or (b) 6.00% per annum.

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A discount on debt equal to this obligation was recorded on the draw date and is being amortized as additional interest expense using the effective interest method over the term of the debt.

As of March 31, 2024, the effective interest rate for all outstanding debt under the 2024 Term Loan was 9.03%.

As of June 30, 2024, the effective interest rate for all outstanding debt under the 2024 Term Loan was 9.03%.

2024 Credit Line

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Amounts repaid under the 2024 Credit Line may not be reborrowed.

As of March 31, 2024, no draws had been made on the line of credit.

As of June 30, 2024, no draws had been made on the line of credit.

We have entered into various operating and finance leases, which are primarily associated with our laboratory facilities and office space.

Total undiscounted future minimum payment obligations under our operating leases and finance leases as of March 31, 2024 totaled approximately $23.8 million, of which $1.8 million is payable through the remainder of 2023 and $22.0 million is payable through the end of 2033.

Total undiscounted future minimum payment obligations under our operating leases and finance leases as of June 30, 2024 totaled approximately $23.7 million, of which $1.3 million is payable through the remainder of 2024 and $22.4 million is payable through early 2034.

The leases expire on various dates through 2033 and provide certain options to renew for additional periods.

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The following table summarizes our sources and uses of cash and cash equivalents for each of the periods presented (in thousands):

Three Months Ended

Net cash used in operating activities $ (6,835) $ (25,439)

Six Months Ended

Net cash provided by (used in) operating activities $ 17,163 $ (29,225)

Net cash (used in) provided by investing activities (41,118) 1,197

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Operating Activities

Net cash used in operating activities was $6.8 million for the three months ended March 31, 2024, and was primarily attributable to decreases in accrued compensation of $14.2 million, increases in accounts receivable of $4.3 million, a net loss of $2.5 million, and increases in accretion of discounts on marketable investment securities of $1.7 million, partially offset by non-cash stock-based compensation expense of $12.7 million, depreciation and amortization of $3.3 million.

Net cash used in operating activities was $25.4 million for the three months ended March 31, 2023, and was primarily attributable to the net loss of $29.2 million, decreases in accrued compensation of $11.6 million, increases in accounts receivable of $4.4 million, increases in accretion of discounts on marketable investment securities of $1.2 million and increases in prepaid expenses and other current assets of $0.7 million, partially offset by non-cash stock-based compensation expense of $13.5 million, change in accounts payable of $3.9 million, depreciation and amortization of $2.9 million and a change in other accrued and current liabilities of $1.0 million.

The $18.6 million decrease in net cash used in operating activities for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 is primarily due to increases in collections from customers attributable to higher net revenues partially offset by increases in operating expenditures.

In part, the cash used during the three months ended March 31, 2024 reflects the payment of annual cash bonuses to our employees as well as certain health care benefit payments totaling $20.8 million, that are not expected to recur during the remainder of 2024.

Net cash provided by operating activities was $17.2 million for the six months ended June 30, 2024, and was primarily attributable to non-cash stock-based compensation expense of $25.9 million, depreciation and amortization of $6.7 million, and net income of $6.4 million, partially offset by decreases in accrued compensation of $7.7 million, increases in accounts receivable of $7.6 million, increases in accretion of discounts on marketable investment securities of $3.4 million, decreases in accounts payable of $1.7 million and deferred income taxes of $1.5 million.

Net cash used in operating activities was $29.2 million for the six months ended June 30, 2023, and was primarily attributable to the net loss of $48.0 million, increases in accounts receivable of $8.0 million, decreases in accrued compensation of $7.1 million, increases in accretion of discounts on marketable investment securities of $2.3 million and increases in inventory of $2.1 million, partially offset by non-cash stock-based compensation expense of $26.4 million, depreciation and amortization of $5.9 million, a change in accounts payable of $3.1 million and a change in other accrued and current liabilities of $2.0 million.

The $46.4 million increase in cash inflows from operating activities for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 is primarily due to increases in collections from customers attributable to higher net revenues partially offset by increases in operating expenditures.

During the six months ended June 30, 2024 net revenues increased by 73.6% compared to the six months ended June 30, 2023 which outpaced the 10.8% increase in net operating expenses for the same period.

In part, the cash provided during the six months ended June 30, 2024 reflects the payment of annual cash bonuses to our employees as well as certain health care benefit payments totaling $20.8 million, that are not expected to recur during the remainder of 2024.

In comparison, we paid $17.7 million during the same period in 2023 towards annual cash bonuses and certain health care benefits.

Investing Activities

Net cash used in investing activities was $19.7 million for the three months ended March 31, 2024 and consisted primarily of purchases of marketable investment securities of $60.8 million and purchases of property and equipment of $9.2 million, partially offset by the maturity of marketable investment securities of $50.2 million.

Net cash provided by investing activities was $16.6 million for the three months ended March 31, 2023 and consisted primarily of the maturity of marketable investment securities of $50.0 million, partially offset by purchases of marketable investment securities of $30.1 million and purchases of property and equipment of $3.3 million.

The $5.8 million increase in cash used for the purchase of property and equipment for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 was primarily due to our purchase of land for cash consideration of $7.2 million on February 9, 2024.

Net cash used in investing activities was $41.1 million for the six months ended June 30, 2024 and consisted primarily of purchases of marketable investment securities of $113.2 million and purchases of property and equipment of $14.4 million, partially offset by the maturity of marketable investment securities of $86.5 million.

Net cash provided by investing activities was $1.2 million for the six months ended June 30, 2023 and consisted primarily of the maturity of marketable investment securities of $95.0 million, partially offset by purchases of marketable investment securities of $86.4 million and purchases of property and equipment of $7.4 million.

The $7.0 million increase in cash used for the purchase of property and equipment for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 was primarily due to our purchase of land for cash consideration of $7.2 million on February 9, 2024.

Financing Activities

Net cash provided by financing activities was $10.6 million for the three months ended March 31, 2024, and consisted primarily of $10.0 million of proceeds from issuance of long-term debt and $1.1 million of proceeds from contributions to our 2019 Employee Stock Purchase Plan (the “ESPP”), partially offset by the $0.5 million payment of employee taxes attributable to the vesting of Restricted Stock Units (“RSUs”).

Net cash provided by financing activities was $0.7 million for the three months ended March 31, 2023, and primarily consisted of $1.0 million in proceeds from contributions to the ESPP and $0.1 million in proceeds from the exercise of stock options, partially offset by the $0.3 million payment of employee taxes attributable to the vesting of RSUs.

Net cash provided by financing activities was $10.7 million for the six months ended June 30, 2024, and consisted primarily of $10.0 million of proceeds from issuance of long-term debt and $1.7 million of proceeds from contributions to our 2019 Employee Stock Purchase Plan (the “ESPP”), partially offset by the $1.1 million payment of employee taxes attributable to the vesting of Restricted Stock Units (“RSUs”).

Net cash provided by financing activities was $1.0 million for the six months ended June 30, 2023, and primarily consisted of $1.7 million of proceeds from contributions to the ESPP and $0.2 million of proceeds from the exercise of stock options, partially offset by the $0.8 million payment of employee taxes attributable to the vesting of RSUs.

In 2021, the rate of inflation in the United States began to increase but has continued to subside since the second half of 2022.

We do not believe that inflation has had a material impact on our financial results during the three months ended March 31, 2024.

We do not believe that inflation has had a material impact on our financial results during the three and six months ended June 30, 2024.

We are unable to predict if the rate of inflation will increase in future periods.

Critical Accounting Estimates

During the three months ended March 31, 2024, there were no significant changes to the information discussed under “Critical Accounting Estimates” included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2023.

During the six months ended June 30, 2024, there were no significant changes to the information discussed under “Critical Accounting Estimates” included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2023.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis